What Can You Afford to Spend on a Home?
There are three elements to understand before you begin the home buying process. Understanding the costs associated with a home purchase beforehand will help you better determine how much house you can afford. The three elements include:
- The down payment
- Closing costs
- The mortgage costs
Do I Have Enough for a Down Payment?
A down payment is the money you pay up front toward the purchase price of your house. Your monthly mortgage payment will be decrease as the amount of your down payment increases. You'll also save money over the term of your mortgage on interest costs. Most mortgage lenders require 20 to 25 percent of the purchase price as a down payment.
Depending on the type of mortgage you intend to have, down payments amounts will vary. If you are a member of the military, special financing may be available which can greatly reduce the amount of the money needed for a down payment. Keep in mind that the lower the down payment, the higher the monthly payment and the more your will pay in interest over the life of the loan.
FHA and VA loans are available at competitive interest rates. An additional benefit is that the seller may pay part of the points. In addition, when the time comes to sell, the next buyer may be able to assume the loan, subject to certain conditions.
If permissible, secondary financing may be used as an alternative way to finance your new home. This means that the seller may hold a second mortgage for 10 percent of the purchase price, while the buyer puts 10 percent cash down.
Typically, conventional lenders are willing to accept a lower down payment if private mortgage insurance (PMI) is secured. PMI protects the lender in case of default on the loan. It will cost more, but it can reduce your down payment to 10 percent.
What are Closing Costs?
Closing costs include the costs of borrowing money, establishing the loan, and preparing the necessary documents to finalize the sale. These costs may be significant and are easily overlooked by a first-time buyer.
The Costs of Borrowing Money. This includes what some lenders call "discount points," a one-time charge to adjust the yield on the loan to what market conditions demand. Each point equals one percent of the mortgage amount. Two and one-half points on a $100,000 mortgage would cost $2,500.
The Costs of Establishing a Loan. These might include the loan origination fee, appraisal fee, and credit reports. Premiums for hazard and mortgage insurance are usually paid at closing. Also, prepaid interest will be collected for the period between closing and the end of the purchase month.
The Costs of Document Preparation. Title costs pay for the search of public records to determine if the property you want to purchase is free from any other ownership or liens. Recording and transfer fees cover the legal recording of the deed with the proper governmental agencies as well as the transfer taxes.
We are happy to sit down with you and help you estimate the closing costs you will be required to pay in addition to your down payment.